Avenue Supermarts Q3 Review: Analysts See Near-Term Disruption On Rising Covid Cases
Shares of Avenue Supermarts Ltd. fell the most in three weeks after analysts see near-term uncertainties due to mounting Covid-19 cases and the stock’s rich valuation as key headwinds.
While that’s a “temporary concern”, brokerages remain bullish in the long term after the operator of DMart supermarket chain in revenue even as commodity price pressure persisted.
The Radhakishan Damani-promoted company added 17 stores in the three months ended December—its highest ever in seven quarters. Its total store count stood at 263 as on Dec. 31, according to an exchange filing.
“Inflation and lesser opportunities to go out are negatively impacting certain categories more than others,” said Chief Executive Officer and Managing Director Navil Noronha. Despite the adverse impact on the mix, gross margins were just 10 basis points lower year-on-year. Revenue rose 35% above pre-Covid levels and operating margins came in at a 10-quarter high of 9.4%.
Shares of Avenue Supermarts fell as much as 2% but pared some of the losses to trade 1.72% lower as of 11:36 a.m. on Monday.
Of the 28 analysts tracking the company, seven maintained a ‘buy’, nine suggest a ‘hold’ and 12 recommend a ‘sell’, according to Bloomberg data. The overall consensus 12-month price target implies a downside of 5.4%.
The stock’s trading volume was 3.8 times the 30-day average volume at this time in the day.
Here’s what brokerages have to say on Avenue Supermarts:
Maintains ‘neutral’ with a target price of Rs 4,500 apiece.
Unlike other retail categories, grocery retailers such as DMart have seen a limited impact and swift recovery from Covid-19, with healthy margin improvement—as 75% of the business remains non-discretionary.
Same-store-sales growth continues to languish: With nearly 34% store and 48% footprint addition over the last eight quarters, same-store-sales growth remained flat against an expectation of 10%. This is largely due to a lower sales contribution from the general merchandise and apparel business, while FMCG has been faring better.
DMart’s 29% revenue and 44% footprint growth versus third quarter FY20 (pre-Covid) and cost optimisation-led profit after tax growth of 43.9% during this period have been remarkable.
Online retail has grown in prominence in the last couple of years. Moreover, the market size has increased nearly 3–4x to Rs 40,000 crore led by a significant change in the business model, presence of deep-pocketed players (such as Amazon.com Inc. and Reliance Retail Ventures Ltd.), and the overlapping of local markets. These factors have made the brokerage cautious considering DMart continues to focus on brick-and-mortar.
The stock is trading at rich valuations of 72x/115x EV-to-Ebitda/P/E on FY23E.
Maintains ‘sell’ and cuts target price to Rs 4,150 apiece from Rs 4,358.
Highest-ever store additions implies confidence on future outlook of brick-and-mortar format and their growth outlook.
Rich valuation at 170x for FY22, 104x for FY23 and 80x for FY24E standalone earnings per share leaves limited room to err.
Lower-than-expected store expansion, cannibalisation, shift in organised market to online with DMart’s slow transition are key risks to an otherwise strong business trajectory in a large addressable market.
Uncertainty due to the third Covid wave remains a key headwind in the near term.
The brokerage reduces EPS estimate by 4/6% for FY23/24E.
Expects DMart to go through a time and/or price correction in near term.
Maintains ‘buy’ with a target price of Rs 7,155 apiece.
Revenue growth (at 18% two-year CAGR) is healthy. However, the brokerage expects this ratio to be 25%+ post normalisation of social distancing norms.
EPS estimates have been revised upward by 11% in FY22E and 2-3% in FY23-24E.
Expects DMart to benefit from current inflationary headwinds driven by market share gain from general trade led by 20-30% discount over MRP.
Positive to note that net margins are above pre-Covid levels now.
Retains ‘accumulate’ but slightly cuts target price to Rs 5,345 from Rs 5,364.
Bill cuts will normalise over FY23 and bill value will get a flip from higher inflation.
With the third Covid-19 wave coming in full fury, the brokerage expects near term uncertainty and increased share of essentials in the sales mix.
Q3 margin expansion of 26 basis points led by cost control shows the robust business model despite deterioration in sales mix and operating cost of 17 new stores opened in Q3 (other expenses up 15.2% year-on-year and 12.6% quarter on quarter versus just 5.9% jump year-on-year in first half of FY22.
Estimates 31% compound annual growth rate for profit after tax over FY20-24 (48.3% over FY22-24).
Upgrades to ‘equal weight’ from ‘underweight’ with target price at Rs 4,338.
The environment of high inflation may increase value consciousness of consumers and augurs well for value-focused retailers like DMart.
Since mid-October, DMart stock has corrected 11% on an absolute basis, 8% relative to the Sensex and 11-19% vs discretionary peers (Titan Co., Asian Paints Ltd.). This underperformance should be capped and DMart should be a market performer now.
The company is better positioned in the online delivery platform (caters to seven large cities) vs in 2020 (one city) to offset the restricted store operations.
DMart Ready (its e-commerce arm) revenue could be up 40% on a year-on-year basis, according to Morgan Stanley’s estimates. However, it still contributes merely 3% of revenue.
Revenue per average store was Rs 35.6 crore—its highest level.
Long-term bullish view on DMart remains intact. Any further price correction could be a good entry opportunity for long-term investors
Retains ‘reduce’ with a target price of Rs 3,966.
Sales recovery at 91% (on revenue/sq ft) lagged our initial expectations of 100% recovery.
Given the pace of recovery, the brokerage cut FY22E revenue/Ebitda estimates by 3%. But the FY23/24 estimates remain unchanged.
Continues to value DMart at 65x EV/Ebitda but is rolling forward the valuation to first quarter of FY23.
Purchase of real estate at favourable rates and hence, store expansion remains a key risk. This arrangement entails huge initial cash outflow, which may involve taking higher debt. In the scenario where new stores fail to pick up, then incremental debt taken for it would need to be serviced from cash flows of other stores, which could impact overall profitability of business.
No incremental update on DMart Ready. This business needs to be keenly watched.
Maintains ‘underperform’ with a target price of Rs 3,800, given steep valuations and sharp rerating seen in the last one year.
Cuts EPS forecasts by 3-9% to factor in Covid-related issues.
Recommends ‘sell’ with a target price of Rs 3,500.
Sees store disruption and raw material inflation affecting the company’s performance ahead.
The scale of the e-commerce business is key.